Presenting a live 90‐minute webinar with interactive Q&A Commercial Loan Workouts: Forbearance Options and Waivers After Default Crafting Forbearance Agreements and Correcting Loan Deficiencies to Strengthen the Lender's Position T d ’ f l f 1pm Eastern | 12pm Central | 11am Mountain | 10am Pacific MONDAY, DECEMBER 13, 2010 T oday’ s faculty features: Matthew T. Gensburg, Shareholder, Greenberg Traurig, Chicago Elizabeth M. Bohn, Partner, Jorden Burt, Miami, Fla. The audio portion of the conference may be accessed via the telephone or by using your computer's speakers. Please refer to the instructions emailed to registrants for additional information. If you have any questions, please contact Customer Service at 1-800-926-7926 ext. 10.
Transcript
Presenting a live 90‐minute webinar with interactive Q&A
Commercial Loan Workouts: Forbearance Options and Waivers After DefaultCrafting Forbearance Agreements and Correcting Loan Deficiencies to Strengthen the Lender's Position
Matthew T. Gensburg, Shareholder, Greenberg Traurig, Chicago
Elizabeth M. Bohn, Partner, Jorden Burt, Miami, Fla.
The audio portion of the conference may be accessed via the telephone or by using your computer's speakers.Please refer to the instructions emailed to registrants for additional information. If you have any questions,please contact Customer Service at 1-800-926-7926 ext. 10.
Continuing Education Credits FOR LIVE EVENT ONLY
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Correcting Deficiencies in Loan Documentation and CollateralDocumentation and Collateral
Pre-Workout Due Diligence
Elizabeth M. BohnJorden Burt LLPJorden Burt LLPMiami, Florida
• Borrower’s business/causes of financial distress.
• Borrower’s obligations under all loan documents (notes, amendments, and security agreements).( y g )
• Loan status and nature of defaults (payment vs. covenant).
• Potential defenses/counterclaims (written correspondence with the borrower).
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A. Review /Understand:A. Review /Understand:
• Lender’s course of dealings with the borrower gon past defaults - has there been history of waivers of defaults or course of dealing contrary to the loan termsto the loan terms.
• Borrower’s revenue sources.
• Borrower’s financials and tax returns.
• Borrower’s other key creditors and critical vendors.
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A. Review/Understand:A. Review/Understand:
• Nature and extent of all pledged collateral p g(mortgage, UCC-1s, rent assignments, accounts, receivables, inventory reports).
• Location of all collateral.
• Value of collateral according to /appraisals/reports.
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B. Search/Investigate/Update InformationB. Search/Investigate/Update Information
• UCC-1 search on borrower and guarantors.g• Review borrower’s debts to key creditors and
vendors.• Property record searches for borrower and
guarantor(s), potential guarantors.• Determine whether lender has received PMSI• Determine whether lender has received PMSI
notices.• Update title search on mortgaged real estate.
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B. Search/Investigate/Update InformationB. Search/Investigate/Update Information
• Obtain updated rent rolls from borrower p(mortgaged property.
• Obtain leases, determine landlord’s lien issues.• Conduct public records search for judgments and
tax liens (borrower and guarantors).• Determine whether all security interests are• Determine whether all security interests are
properly perfected.• Determine which collateral is subject to competing
liens.
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C. Analyze Collateral/Repayment SourcesC. Analyze Collateral/Repayment Sources
• Review existing real estate appraisals.g pp• Update appraisals using qualified expert
appraiser.• Analyze rent rolls.• Request financial reports and information called
for in loan documents from borrowerfor in loan documents from borrower. • Request updated financial statements from
borrower.
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C. Analyze Collateral/Repayment SourcesC. Analyze Collateral/Repayment Sources
• Obtain/analyze borrowers’ accounts receivable.y• On-site audits of inventory, equipment and other
hard collateral at borrower’s locations.• Evaluate risk of dissipation and loss of collateral.• Develop/implement plan to monitor collateral
subject to dissipation during workout processsubject to dissipation during workout process.• Determine existence of potential additional
collateral.
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D. Deposit Accounts/Control AgreementsD. Deposit Accounts/Control Agreements
• No perfection by filing, control required under UCC §9-401.
• Request statements from borrower reflecting all depository accounts (bank accounts, funds, securities).securities).
• Determine who has access to accounts.• Transfers of accounts to lender (to permit set-off).
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D. Deposit Accounts/Control AgreementsD. Deposit Accounts/Control Agreements
• Accounts at other institutions.
• Require lender approval of disbursements.
R i i ti t i t t l t• Review existing tri-party control agreements with borrower and other financial institutions.
Must permit lender to direct disposition of funds• Must permit lender to direct disposition of funds in account without borrower’s consent.
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D. Deposit Accounts/Control AgreementsD. Deposit Accounts/Control Agreements
• Springing vs. non-springing controls p g g p g gagreements.
• Determine notice requirements of lender to qdepository to stop borrower instructions.
• Consider locking down accounts to giveConsider locking down accounts to give lender immediate control.
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E. Guaranties/Additional CollateralE. Guaranties/Additional Collateral
• Consider obtaining new guaranties in exchange g g gfor forbearance.
• Review updated financial statements for i ti texisting guarantors.
• Public records search for guarantor property and liens.and liens.
• Determine what additional collateral may be requested from borrower/guarantors.
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F. Landlord WaiversF. Landlord Waivers
• Borrower operations at leased locations.p• UCC § 9-3011(2) defers to state law rules on
priority of landlord’s possessory liens for rent vs. UCC liUCC liens.
• Review state law statues for creation/enforcement of landlord’s liens.creation/enforcement of landlord s liens.
• Determine collateral subject to landlord’s liens.• Seek waiver of landlord’s liens.
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G. UCC ForeclosuresG. UCC Foreclosures
• Secured party may take possession of collateral p y y pwith or without judicial process under UCC §9-609
• Whether or not to retake – factors:
o Will debtor surrender without breach of peace?
o Does debtor need collateral to operate?o Does debtor need collateral to operate?
o What is collateral value in forced sale?
o Sale in vs. out of ordinary course of business.
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G. UCC ForeclosuresG. UCC Foreclosures
• Whether or not to retake – factors:o What is risk of collateral waste/dissipation?o Will debtor participate in orderly sale?o Will debtor agree to strict monitoring/direct
payment to lender of proceeds?o If required cost of judicial repossessiono If required, cost of judicial repossession
(replevin).
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G. UCC ForeclosuresG. UCC Foreclosures
• Lenders’ duties as to repossessed collateral:po Sale or disposition of collateral must be
commercially reasonable.o Notice of sale required to borrower,
guarantors, other parties with interest in collateral UCC §9-613.collateral UCC §9 613.
o Public vs. private sale.o Debtor’s right to redeem collateral.
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H. Reservation of Rights Letter (“Preworkout”) A tAgreement
• Written agreement to enter workout gnegotiations.
• Acknowledge loan documents.g
• Acknowledge defaults, insecurity, other reasons for loan modification or forbearance discussions.
• Parties intend to engage in settlement negotiations.
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H. Reservation of Rights letter (“Preworkout”) A tAgreement
• Content of settlement negotiations will be privileged g p gand inadmissible in any state, federal or bankruptcy proceeding.P ti i ti i ti ti ill t b d d• Participation in negotiations will not be deemed waiver of any right under loan documents or used against lender for any purpose.
• No communications binding or usable against either party.N difi ti f l d t l d til• No modification of loan documents unless and until formal written modification agreement executed.
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H. Reservations of Rights Letter (“Preworkout”) A tAgreement
• Participation in settlement negotiations shall not p gprejudice the lender in any manner, or create any defenses in the event of subsequent litigation or bankruptcybankruptcy.
• If negotiations result in an agreement acceptable to both parties, formal, written loan modification agreement will be executed setting forth the terms.
• Lender maintains all rights provided under existing loan documents as if the negotiations did not occurloan documents as if the negotiations did not occur unless written modification is signed.
g | g g |77 West Wacker Drive, Suite 3100 | Chicago, Illinois | 60601
Premise: Often, the most effective action a creditor can take to collect a debt is to refrain from initiating a lawsuitto collect a debt is to refrain from initiating a lawsuit.
Reasons: Litigation entails risk, expense and delay, and is often the
precursor to a bankruptcy petition, with its resultant complications.p
Options are available that can preserve an ongoing relationship between the debtor and creditor.
A consensual workout can reduce the amount of management time diverted from operations, eliminate substantial administrative expenses and preserve asset values for the b fit f b th th dit d d btbenefit of both the creditor and debtor.
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Whether to Enter into a Consensual Workout Involves a Multiple Step AnalysisInvolves a Multiple Step Analysis
First, the creditor must evaluate the strength of its legal position. (What is the anticipated outcome of the foreclosure effort.)
Second, the creditor should calculate the “transaction costs” ,associated with litigation. These costs may take several forms:
□ litigation expenses, g p ,□ the time value of money, and □ any tax consequences of litigation.
Third, the creditor should be assessing the value of any assets pledged, both on an “as-is” and stabilized basis, as well as the collectability of any deficiency judgment obtained.
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Recommended Provisions For Workout Agreements g
If the economics of the transaction justify a consensual workout the accord should a consensual workout, the accord should be memorialized in a written workout or forbearance agreement.
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1. Borrower’s Acknowledgment of the Obligation and Defaultand Default
One of the objectives of a workout agreement is to eliminate areas of dispute If the forbearance agreement fails it needs areas of dispute. If the forbearance agreement fails, it needs to contain recitals which ensure that any subsequent collection efforts proceed as efficiently as possible.
Borrower should acknowledge: Borrower should acknowledge:
□ gross loan balance, including:– the principal balance;– all accrued interest;– late charges;– miscellaneous expenses.p
□ existence of contractual defaults.
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2. Borrower Must Waive and Release Claims Against the Lender
This is true, whether or not such claims have been raised or otherwise articulated to the Lender
Against the Lender
otherwise articulated to the Lender.
Borrowers Acknowledgment. In consideration of the agreement of Lender to extend the time for payment of the principal indebtedness evidenced by the Note and secured by the Mortgage, Borrower hereby acknowledges that Borrower has no defense, offset or counterclaim to the payment of
id i i l i t t f d h g th said principal, interest, fees and charges or any other indebtedness evidenced by such Note and secured by such Mortgage, and hereby knowingly and voluntarily waives and relinquishes any such defense offset of counterclaim to the relinquishes any such defense, offset of counterclaim to the extent any such defense, offset or counterclaim may exist.
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3. Lender’s Reservation of Rightsg
The lender will want to reserve its rights against responsible third parties, such as co-makers, endorsers or guarantors.
Reservation of Rights Against Third Parties. This Agreement is made on the express condition that it shall not be construed as precluding lender or any successors or assigns, from p g y g ,enforcing any rights against any person liable on the obligation secured as maker, endorser, guarantor, or otherwise, whose written consent hereto has not he been obtained, for which purpose such debt may be treated as overdue and collected immediately in accordance with the terms of the Note as if this Agreement had not been made.
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4. Borrower and Guarantor Should Ratify the AgreementsAgreements
The borrower should ratify the original loan and security agreement, and the guarantor should consent to the work-out agreement.
Ratification. Each of the undersigned hereby consents to the terms and conditions of Lender’s agreement to extend and gforbear pursuant to the terms of the certain Forbearance Agreement and Amendment to Loan and Security Agreement dated as of [date] by and between [creditor and debtor] (the “Forbearance Agreement”) and agrees that their respective obligations, as the case may be, with respect to any obligations to Lender under the Forbearance Agreement and C ti i I di id l G t h ll t b i i d Continuing Individual Guaranty, shall not be impaired, modified, changed, released, discharged or otherwise affected and that said Forbearance Agreement and Continuing Individual Guaranty are hereby ratified and
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Continuing Individual Guaranty are hereby ratified and reaffirmed and remain in full force and effect.
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5. Lender Not Waiving Rights and Remediesg g
By entering into a workout or forbearance agreement, it should be made clear that the Lender is not waiving its rights or remedies under law or equity or remedies under law or equity.
Rights and Remedies. This Agreement in no way constitutes a waiver of the Bank’s rights and remedies at law or in equity or as provided for in the Loan Documents In the event that or as provided for in the Loan Documents. In the event that the Borrower and/or the Guarantor fail to comply with the terms and conditions hereof, the Bank’s agreement to forbear and any other agreements and covenants of the Bank hereunder shall immediately and automatically terminate without any obligation of the Bank to give the Borrower or the Guarantor any notice thereof and the Bank may at any time exercise its rights and remedies at law or in equity and time exercise its rights and remedies at law or in equity and as provided for in the Loan Documents. Except as to the Bank’s agreement to forbear pursuant to the terms of this Agreement, all provisions of the Loan Documents shall
i i f ll f d ff
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remain in full force and effect.
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6. Bankruptcy Waiverp y Can a borrower waive its right to declare bankruptcy?
Can the automatic stay be waived by a borrower?□ Some courts have ruled that pre-bankruptcy waivers of the
automatic stay of §362 are unenforceable. Such waivers are invalid due to the debtor’s lack of capacity to act on
behalf of the debtor-in-possession;
Such waivers are unenforceable under specific provisions of the Bankruptcy Code which limit the effectiveness of certain contractual provisions that take effect upon the filing of the bankruptcy case; and
Such waivers are extinguished by the Bankruptcy Code which abrogates the freedom to contract around its essential provisionsthe freedom to contract around its essential provisions.
□ Some courts enforce contractual waivers of the automatic stay. A pre-petition waiver of bankruptcy benefits may be binding unless the
agreement was obtained by coercion, fraud or a mutual mistake of material factmaterial fact.
Such waivers are not self-executing and are not binding on third parties.
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